Secrecy and Safety
Andrew F. Daughety, Jennifer F. Reinganum
American Economic Review · 2005 · Volume 95 · Issue 4
Abstract
We provide a model showing that the use of confidential settlement as a strategy for a firm facing tort litigation leads to lower average safety of products sold than would occur if the firm were committed to openness. A rational risk-neutral consumer's response in a market, wherein a firm engages in confidential settlements, may be to reduce demand. A firm committed to openness incurs higher liability and R&D costs, though product demand is not diminished. We identify conditions such that, if the cost of credible auditing (to verify openness) is low enough, a firm prefers to eschew confidentiality.
Keywords
Asymmetric and Private Information, Mechanism Design, Tort Law and Product Liability, Forensic Economics, Information and Product Quality, Standardization and Compatibility
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